Hard money loans can be a powerful tool to have in your investing toolbox for those occasions when you need to stretch your funds to make a deal go through or want to expand your real estate portfolio by buying multiple properties in a short period of time. Since hard money lenders focus primarily on the property itself rather than a myriad of financial details that ultimately have little to do with the deal, they can be an excellent source of quick and versatile financing for commercial real estate investment deals.

Hard money lenders typically charge higher interest rates than traditional lenders; however, the additional cost of hard money loans is frequently offset by the following benefits:

1.      Rapid approval timeframes. Once you’ve obtained an appraisal and other necessary documents, the turnaround time for most hard money requests is typically a matter of weeks (as opposed to the months required for approval by traditional lenders).

2.      Fewer requirements. Since hard money loans are based on the value of the asset, the lenders generally have fewer requirements for borrowers to meet (e.g., credit scores or debt-service coverage ratios). This can be particularly useful for groups of investors with numerous members that find the bank’s approval process onerous and unwieldy.

3.      Streamlined underwriting process. Hard money lenders typically have less red tape for borrowers to deal with than their banking counterparts. Another advantage of hard money lenders is that they will often be willing to base their loan amounts on different values than traditional lenders. For example, if you’re buying a distressed property that you intend to rehabilitate, a hard money lender will often use the “as-improved” value of the property rather than the purchase price to determine your loan amount, whereas a bank or institutional lender will have to use the lesser of the two values (typically the purchase price). Thus, by using a hard money loan, you can potentially fund both the purchase of the property as well as the necessary improvements.

4.      Borrowing without arbitrary limits. Oftentimes, traditional lenders will impose limits either on how much debt or how many loans a borrower can have, resulting in rejections of applications by otherwise qualified borrowers. Because hard money lenders look at each loan application or property deal in isolation (without considering a borrower’s global debt), they can be particularly useful for investors with large portfolios of investment properties or who carry higher percentages of debt.